Sun Will Face Uphill Struggle To Return To Growth

Sun Pharmaceutical Industries will face an uphill struggle in its new fiscal year to return to sales growth, and of particular concern will be the net loss recorded in Q118. Issues in both India and the US, the firm's two largest markets, have hampered Sun, but the situation in the US is especially pressing. Revitalising its presence in the US will be essential for Sun to turn its fortunes around; continued declines in Q218 will see US sales halve over their value two years ago.

Sun Pharmaceutical Industries has reported total income from operations for Q118, ended June 30 2017, worth INR62,087.9mn (USD961.7mn), down by 24.8% over the INR82,562.6mn reported for Q117, and down by 13.0% over the INR71,369.6mn reported for Q417. Within this, total product sales reached INR61,666.6mn (USD955.2mn), equal to 99.3% of total income. This was down by 23.0% over the INR80,066.8mn reported a year earlier, and down by 9.6% over the INR68,251.6mn reported for Q417.

Sun's MD, Dilip Shanghvi, commented that the company's Q118 performance was not good and was not in line with its past performance. Shanghvi added that this was because of the combined impact of increasing investments in Sun's global specialty business, temporary disruption in its India business because of Goods and Services Tax (GST) implementation, a challenging US generic pricing environment and the modafinil settlement. However, Shanghvi expects Sun's performance to gradually improve in H218.

The GST regime was implemented in India in July 2017, replacing the older state-by-state taxation system. Under the new system, all central- and state-level taxes and levies on all goods and services have been absorbed within an integrated tax having two components: a central GST and a state GST. BMI has previously argued that although in the short term pharmaceutical companies will face challenges, including financial challenges, the need to reassess existing supply chains and an acute shortage of medicines in pharmacies, in the long term GST will simplify tax structure and bring operational efficiencies (see 'GST Implementation Will Improve Operating Environment For Drugmakers In The Long Term,' June 7 2017).

In July 2017, Sun issued a communique to the Bombay Stock Exchange reporting that it and one of its wholly owned subsidiaries had entered into settlements with certain plaintiffs regarding litigation over modafinil, pending in the US District Court for the Eastern District of Pennsylvania. The settlements extend to all claims brought by Apotex and the retailer purchaser plaintiffs. Sun gave no further details, noting that the settlements remain subject to the execution of definitive documentation and the terms of the settlements are confidential.

Sun reported a net loss in Q118 of INR4,249.2mn (USD65.8mn); this is the firm's first reported net loss, and compares to a net income of INR20,337.1mn in Q117, and INR12,237.1mn in Q417.

Sun has now had three consecutive quarters of declining sales, which have fallen by 24.9% over the INR82,651.2mn reported for Q217. During the last three quarters the rate of decline has shown no sign of levelling off, and if the rate of decline continues, the firm can anticipate Q218 revenues approaching the INR50,000mn (USD774.5mn) mark. What will be particularly concerning, however, is the dip into net loss seen in this latest quarter.

Sun's Profits Fall Into The Red

Sun's Top-Line Quarterly Results (INRmn)

Source: Sun Pharmaceutical Industries, BMI

US Sales Remain Central But Continue To Fall

In Q118, US formulation sales remained central to Sun's financials, with revenues worth INR22,646.3mn (USD350.8mn). However, this was down by 44.4% over the INR40,706.4mn reported a year earlier, and down by 11.3% over the INR25,544.7mn reported for Q417. Sun reported that sales for Q117 had included the benefit of generic imatinib exclusivity, which expired in July 2016. Alongside this, overall pricing pressures in the US generics market also impacted the y-o-y growth.

At the same time, Sun added, its subsidiary, Taro Pharmaceutical Industries, reported net sales of USD161.3mn for Q118, down by 31.0% over the USD233.9mn reported a year earlier, and down by 17.9% over the USD196.4mn reported for Q417. Taro operates predominantly in the US market and its fortunes over the last few quarters have shown a decline as well. Taro did report a net income for the latest quarter, unlike its parent; this was worth USD54.5mn in Q118, but was down by 50.4% over the USD109.9mn reported a year earlier, and down by 34.3% over the USD83.0mn reported for Q417.

Taro's Fortunes Also Suffer

Taro's Top-Line Quarterly Results (USDmn)

Source: Taro Pharmaceutical Industries, BMI

Sun's India formulation sales have also taken a knock; in Q118, these were reported at INR17,607.8mn (USD272.7mn). This was down by 5.0% over the INR18,542.7mn reported in Q117, and down by 8.1% over the INR19,163.6mn reported for Q417. Sun noted that growth was temporarily impacted by the implementation of GST in India, but added that the underlying growth remains robust. Emerging Markets sales reached INR10,804.0mn (USD167.4mn); although this was down by 10.9% against the INR12,127.3mn reported for Q417, it was up by 4.8% over the INR10,311.2mn reported for Q117. According to Sun, the growth reported here was partly boosted by the consolidation of the Biosintez acquisition in Russia. In November 2016, Sun entered into a definitive agreement for the acquisition of an 85.1% stake in Biosintez, a Russian pharmaceutical company engaged in the manufacturing and marketing of pharmaceuticals in Russia and the CIS region. Biosintez is based in Penza, and was created in 1959; the firm focuses on the hospital segment. BMI noted at the time of the acquisition that whilst the US remained essential to Sun's sales outlook, the agreement highlighted the growing importance Sun has attached to emerging markets (see 'Russian Acquisition Will Boost Sun's Emerging Market Outlook,' November 28 2016). Acquiring a Russian company was an essential move in order to effectively serve the Russian pharmaceutical market whilst adhering to Russian governmental localisation drives, and Biosintez provides Sun a company with a long-established history in Russia.

Rest of the World formulations sales did see an improvement compared to prior quarters, but with sales worth INR7,424.1mn (USD115.0mn) in Q118, this was Sun's smallest segment. Nonetheless, sales grew by 32.0% over the INR5,624.9mn reported a year earlier, and by 1.4% against the INR7,323.3mn reported in Q417. Sun noted that the growth was partly boosted by the consolidation of revenues from the acquisition of 14 prescription brands in Japan from Novartis that was completed in April 2016.

The loss of revenues in the US will be of particular concern for Sun; a further fall in Q218 towards INR20,000mn (USD387.3mn) would see revenues from Sun's most important region stand at around half what they were 18 months earlier. The downturn in sales in India will also be of concern, but if the underlying cause of this has been the changes to the GST system, then these revenues should at least stabilise in Q218.

Major Segments Falter

Sun's Quarterly Results By Segment (INRmn)

Source: Sun Pharmaceutical Industries, BMI

Non-US Sales Continue To Gain Ground

Whilst the US remains Sun's most important market by value, the combined value of its non-US sales has again outstripped those achieved in the US. Whilst US formulation sales were worth INR22,646.3mn in Q118, the combined value of non-US sales were worth INR35,835.9mn (USD555.1mn). This is now the third quarter in a row in which combined non-US sales have been worth more than US sales and the difference is growing. In Q317, non-US sales were worth INR4,701.1mn more than US sales, but in Q118 this has risen to INR13,189.6mn (USD204.3mn).